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Sharp Disagreements Cloud Not-for-Profit Proposal’s Future

The FASB proposal for the first significant changes in more than 20 years to the financial reporting by not-for-profit organizations is facing some fierce resistance. The changes have some supporters, but the conflicting messages have left board members uncertain about how to proceed toward writing a final set of amendments.

The FASB’s proposal to overhaul the financial reporting by charities, universities, foundations, and other not-for-profit organizations continues to elicit conflicting views.

Representatives from audit firms, analyst organizations, and not-for-profit groups at a roundtable meeting at the FASB headquarters in Norwalk, Connecticut on September 21, 2015, told the accounting board they liked some parts of the proposal, but many more parts troubled them. Some suggested the FASB would be better off keeping the sections of U.S. GAAP for not-for-profit organizations as is.

FASB members expressed their frustration at the contradictory feedback, particularly on the proposed changes to the statement of activities.

Proposed Accounting Standards Update (ASU) No. 2015-230 , Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities , was released in April 2015 to solicit comments on the FASB’s plan to establish consistent reporting by not-for-profit organizations in how they present their statement of activities. The proposal calls for changes in classes of net assets — assets with donor restrictions and without — to be presented on the face of the statement. The organizations would have to provide information about their operating expenses by their nature, which includes salaries, rent, utilities, depreciation, awards and grants to others, and professional fees, and function, which assigns costs to the organization’s programs and supporting services.

The proposal also seeks changes to the concept of operating activities, which reflect the mission of the organization and the availability of funds.

Today, there is flexibility to determine an organization’s operating activities, which are largely considered to be activities and transactions that are “ongoing major and central” to the organization’s mission. Some participants at the September 21 panel said such flexibility was important because of the wide range of not-for-profit groups out there — from neighborhood soup kitchens to hospitals with multimillion dollar budgets.

“I am somewhat perplexed at this point,” FASB member Daryl Buck said. “What we have proposed had the objective of addressing what we heard as concerns expressed by members of the [Not for Profit Advisory Committee] and others in the not-for-profit space.” Outside advisers had told the accounting board that there was a need for an updated format of the statement of activities that would do a better job of communicating a not-for-profit organization’s financial condition to interested parties such as financial sponsors and other donors.

Buck said he thought the proposal achieved this goal, but now some people want the FASB to keep current practice intact.

“It’s difficult to understand where’s the consensus, where’s the sweet spot we can land,” Buck said.

The proposal has drawn more than 260 comment letters, many of them criticizing its fundamental aspects. Critics are particularly unhappy with the provisions that increase the differences between the accounting by not-for-profit organizations and profit-making enterprises.

The accounting guidance for not-for-profit organizations, outlined in SFAS No. 116 , Accounting for Contributions Received and Contributions Made , (FASB ASC 958), and SFAS No. 117, Financial Statements of Not-for-Profit Organizations , recognizes that there are important differences between for-profit and not-for-profit organizations. But the basic financial reporting model is the same.

Proposed ASU No. 2015-230, on the other hand, draws a sharp divide between the reporting by business enterprises and not-for-profit groups.

Most significantly, it calls for not-for-profit groups to present the statement of cash flows using the direct method of presentation — a move that faced significant resistance when the FASB considered whether to require it for business enterprises.

The direct method requires separate reporting of cash receipts and payments tied to operating activities. The indirect method starts with net income, adjusts for all noncash transactions, and then makes a second adjustment for cash-based transactions. Both methods get to the same result, but most accountants are familiar with the indirect method, even though many of them say it is more complex. The majority of businesses report cash flow with the indirect method.

Many organizations, both businesses and not-for-profits, object to direct cash flow reporting because of the difficulty in gathering the data needed to employ it and the higher costs they believe they will incur for employing it. In the Basis for Conclusions for Proposed ASU No. 2015-230, the FASB said indirect cash flow reporting carries with it costs of its own. Plus the constituents of many not-for-profit groups want to see direct reporting because they believe the information will be more useful than what is currently available.

Still, FASB Chairman Russell Golden and Vice Chairman James Kroeker dissented from the direct reporting decision because they do not want to see the guidance for cash flow reporting amended in a way that adds to the differences between the accounting by businesses and not-for-profit groups.

Most of the comment letters on the proposal do not support the move to the direct method of presentation, although there were several supporters of the decision at the September 21 roundtable.

Public universities have been using the direct method for more than a decade, and, while the first year to adopt it was tough, most say it is now easy to implement and understand, said Susan Menditto, director of accounting policy at the National Association of College and University Business Officers.

“We hear both from preparers and users of that statement how much they really like it; the cash flow statement is finally telling you something,” Menditto said.

To most of the critics of the FASB’s proposal, requiring the direct method of presentation would create too sharp of a reporting divide between not-for-profit groups and for-profit organizations. Many have said, for example, that members of boards of not-for-profit groups typically come from the private sector and would have difficulty understanding a cash flow statement reported under a different technique from that of a business enterprise.

FASB member Marc Siegel said he was having trouble digesting the feedback to keep not-for-profit and for-profit reporting aligned because, when the FASB works on separate accounting issues dealing with recognition and measurement questions, it often is asked to put in breaks or extra time to comply with a potential new standard for not-for-profit organizations.

“On every recognition and measurement project we do we hear ‘But wait. Not-for-profits are unique. You shouldn’t make them do the same thing as for-profits; they should be recognized differently,'” Siegel said. “So I’m having trouble reconciling.”

The FASB plans to hold another roundtable discussion on the not-for-profit proposal on October 6 in Los Angeles.

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